Gap to return to TV ads and open first store in China

No. 1 U.S. clothing chain seeks to reverse years of market-share declines

By

AndriaCheng

NEW YORK (MarketWatch) -- Gap Inc. will begin advertising its namesake brand on television in November after a two-year hiatus, among other initiatives to regain market share and spur sales, the company told analysts and investors Thursday.

The No. 1 clothing chain also will open its first company-owned Gap store in China next year, expand its outlet stores overseas and launch an online business in Canada and the United Kingdom in 2010.

International and online businesses combined have grown about 20% to almost one-fifth of Gap's
GPS, +1.93%
total the past two years, Chief Executive Glenn Murphy said at the meeting in New York. Gap has franchised locations in 25 countries besides its company-owned shops in the United States, United Kingdom, Canada and Japan, as well as some in Ireland.

Acknowledging that consumer spending still remains challenging heading into the holiday season, Murphy said several initiatives to turn around the company's business -- including the launch of the Gap chain's 1969 premium-denim line and Old Navy's Supermodelquin advertising campaign -- have resulted in positive feedback. They helped give the company hope that it still has what it takes to regain lost market share in North America, while tapping into growth overseas at the same time, he added.

"We are walking a little taller," Murphy commented. "The confidence is just beginning to come back. We are running in parallel course online and internationally. We clearly saw the opportunity for the corporation to move proactively internationally."

The company still has a lot of work to do. Total Gap sales at stores open at least a year have declined an average of 4.5% the past two years, lagging the specialty-apparel group's already underperforming 3.9% drop, according to Retail Metrics. In September, Gap sales fell 1%, missing estimates, with shortfalls at both the Gap division and Banana Republic even as Old Navy outperformed. See full story.

Gap shares fell 1% to $22.76 in mid-afternoon trading Thursday. The stock has surged 70% this year, outpacing the 41% gain in the S&P Retail Index, on investor expectations that the company may be on an upward trend and could even outperform its sector group.

Returning Gap to television advertising "signals improved product confidence," said Jefferies & Co. analyst Randal Konik in a note following the meeting. "Old Navy momentum continues. (With) business trends appearing to be near stabilization at the two largest divisions, we believe earnings could show sizable upside in (the second half) and 2010 especially as comparisons ease."

On the air

New TV commercials will be part of the company's plans to increase its marketing spending by $25 million in the third quarter and by $45 million in the fourth quarter, according to Chief Financial Officer Sabrina Simmons. She also said Gap will reduce its square footage by about 10% over the next five years as it consolidates stores and relocates to smaller-size locations and negotiates expiring leases early to lock in better rates.

'We are pushing the decision-making down to people who really know what's going on. This shouldn't be a complicated business.'
CEO Glenn Murphy

"Gap's marketing muscle in [the second half] will prove to be a strong competitive advantage in an environment where cost-cutting is shrinking marketing budgets," said FBR Capital Markets analyst Adrienne Tennant in a recent report, after increased marketing spending helped lift results at Old Navy in September. "We remain confident the company has further room to improve."

In addition, Gap has shifted buying to cheaper countries such as Vietnam to lower product costs, along with making sure every dollar spent has a justified return, executives said. The company has cut almost one-fifth of its staff at San Francisco headquarters in the past two years and let 50 vice presidents go, as Murphy sought to simplify the organizational structure. Gap also has taken more than $650 million in operating expenses out of its business since the beginning of financial year 2007.

Murphy has controlled expenses and inventory and rolled out localized promotions and discounts to bolster profit. "We are pushing the decision-making down to people who really know what's going on," he remarked. "This shouldn't be a complicated business."

For the Gap chain, the company said it will continue to reinvent product categories such as khakis and pants next year, after this year's introduction of the premium-denim line. But while the 1969 jeans have helped to generate customer awareness and traffic, the line has failed to translate into sales among other categories, analysts said.

Turnaround of Old Navy

For its largest sales division and lowest-priced chain Old Navy, the company said it will focus on improving customer service through a new store design that it said will be in about 50 locations by the end of this year. In addition to the Supermodelquin ad campaign, devoted to highlighting affordable prices, Old Navy has promoted items under $5 or $10 to attract increasingly budget-conscious shoppers. That has yielded some dividends.

Old Navy posted a better-than-expected 13% increase in sales in September, its best performance in more than five and a half years, according to Retail Metrics.

Plan for Banana Republic

The company said its upscale Banana Republic brand has become "too serious" and "too heavily work-focused." The retailer said it will create a more versatile wardrobe that balances products more evenly across weekend, work and going-out occasions to allow consumers to transition directly from what they wear for work to evening activities.

It also will push more tie-ins with local businesses or partners, or with programs such as the popular TV drama "Mad Men."

On top of the recession that hurt apparel retailers across the board, demand for Gap's goods had been hurt after it had failed to introduce timely fashions such as tight-fitting skinny jeans, while hipper names such as Abercrombie & Fitch Co.
ANF, -0.51%
and J. Crew Group Inc.
JCG
run by former Gap chief Mickey Drexler, had lured shoppers, according to analysts.

After growing its online sales to more than $1 billion in fiscal 2008 from $595 million in fiscal 2005, Gap also said it'll make it possible for its customers in Canada and the United Kingdom to shop online.

Its direct business, in addition to the top three Gap brands, also includes its acquired activewear brand Athleta and shoe site Piperlime. Gap has added customer reviews across all of its brands' sites and has offered contemporary-style apparel to complement the shoe and handbag selection on Piperlime.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.